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No amount of good news is small news in a country battered by socioeconomic crisis, an enduring pandemic, violence, a stuttering power-generation utility and the petty squabbles of an out-of-touch and self-serving political class.
Looking at the short-term growth forecasts for SA, one can be forgiven for experiencing some relief after the sheer awfulness of the past 18 months. Consensus forecasts place 2021 growth at about 5%.
This and an unexpected tax windfall from mineral exports have pushed away the risk of a full-blown fiscal crisis. Recently appointed finance minister Enoch Godongwana appears determined to hold the line, acknowledging the dangers of fiscal profligacy and seeking to manage growth expectations beyond this year.
When Godongwana warns of an Argentina or Greece scenario, he is not far off the mark: between 2011 and 2019, SA experienced a classic growth collapse. Pre-2020 average GDP growth declined from a mediocre 2.2% in 2010-2014 to a miserly 0.8% in 2015-2019.
From this perspective, rather than from the short-termism most economists seem devoted to, 5% growth followed by less than 2% does not call for celebration. The pandemic and current “recovery” excluded, my firm, Eunomix, has just calculated as part of our latest annual report on SA that structural growth now sits somewhere around -0.5%.
There are very real prospects that past the fumes of recovery of 2022-2023, SA will downgrade from structural growth collapse to real economic decline. In fact, this has already begun. Since 2014, real incomes have been losing ground at a rising pace. They were 10% lower in 2020 than in 2014.
South Africans are getting poorer with each passing year. And more desperate. The July lootings were just the latest proof of this, as was the mass stayaway during the recent local government elections.
Discounting these events as a product of politics and not economic crisis is a grave error. They are a portent of things to come. We forecast that by 2030, SA will have downgraded from middle-income to lower middle-income status, after three decades of continuous and accelerating slide relative to the vast majority of countries in the world (Graph 1).
Worse still, the pandemic has brought forward by two years our 2020 forecast of when the country is likely to rank as a failed state — from 2030 to 2028. If last year SA had about 10 years to arrest a decline that is on a par with countries at war, it now effectively has only six to seven years.
Government expenditure has proved to be a singularly inadequate compensatory mechanism. First, it has not sought to change the structure of the economy but rather to manage the effect of stagnation through an ever-expanding welfare state.
Second, the vast inefficiency of the public sector has led to poor policy design and worse implementation. Entire swathes of government are already at failed-state level.
Third, as sources of growth have been exhausted at an accelerating rate, the volume of budgetary compensation demanded has become impossibly high.
Consider this: fixed investment was below 20% of GDP in 2016-2019, collapsed to 12.5% in 2020, is forecast at 12% in 2021 and is not expected to recover to its 2020 level until 2024. Middle-income countries average 30% — not incidentally the target of the now defunct National Development Plan.
Private sector and foreign investors are on a perfectly logical strike. Catching up with middle-income countries under current policy would thus fall on the government. In 2020, the fixed investment deficit of 30% amounted to nearly R1-trillion — equivalent to almost 60% of the budget. Plugging the mounting gap for 2020-2024 would cost R4.5-trillion.
Gross government debt is forecast to rise from R4.3-trillion in 2021/2022 to R5.5-trillion in 2024/2025. A government-funded fixed-investment drive would thus more than double the debt in a short three years to over R10-trillion — nearly 150% of GDP.
Were government foolish enough to take that path, or even a sizeable portion of it, economic catastrophe would rapidly ensue. Yet many sirens counsel the government to do just that, persuaded that an ambitious debt-fuelled increase in fixed investment, coupled with further expansion of the welfare state, will bring about debt-busting growth levels well before the devil catches on.
These sirens were clearly asleep during a Jacob Zuma presidency that was almost exclusively premised on the expenditure multiplier. It vastly increased debt in search of growth, but instead delivered the 2011-2019 growth collapse. That state capture followed state expansionism seems also to have escaped the sleepy sirens. The government expenditure lever has already been used, has abjectly failed and is no longer available (Graph 2).
The problem lies elsewhere. Our new report shows that SA’s economic structure is untenable. It has the policies of a resource-rich and capital-intensive country but is neither. Instead, it is a labour-rich country whose policies are anti-labour intensity.
With a policy entirely divorced from economic structure, the economy is increasingly divorced from its resource endowment and sources of sustainable growth. The result is that it cannot produce enough economic goods and services to sustain itself. Hence the growth and income collapse.
Fiscal prudence alone will not deliver growth — it will simply manage the decline. SA is not an aeroplane out of runway at take-off in need of a bit more power (the fiscal multiplier). Nor is it one in need of the urgent application of brakes and flaps after a fast flight (overheating). It is an aeroplane out of fuel well ahead of the runway, overloaded with passengers and cargo, facing mechanical failure and unable to afford much more in-flight refuelling (structural collapse).
Until and unless the correct diagnosis and solutions are applied — getting prices right, from labour to power, to restart the investment engine — decline is all but guaranteed. Yet prevarication over strategic infrastructure, the craze for localisation and resistance to the energy transition all signal that most in government remain intent on keeping the prices wrong.
President Cyril Ramaphosa and Godongwana must now take charge and force the issue before it is forced upon them or their successors.
• De Baissac is CEO of political and economic risk consultancy Eunomix Group.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.